Optimal Input Mix

Essay

Optimal Input Mix. Rachel Green, owner-manager of the Manhattan-based Central Perk Coffee Shop, is reviewing the company's compensation plan. Currently, the company pays its three experienced management staff members salaries based on the number of years of service. Chandler Bing, a new management trainee, is paid a more modest salary. Monthly sales and salary data for each employee are as follows:
Bing in particular has shown great promise during the past year, and Green believes a substantial raise is clearly justified. At the same time, some adjustment to the compensation paid other sales personnel would also seem appropriate. Green is considering changing from the current compensation plan to one based on a 9% commission. Green sees such a plan as fairer to the parties involved and believes it would also provide strong incentives for needed market expansion.
A. Calculate Central Perk's salary expense for each employee expressed as a percentage of sales generated by that individual.
B. Calculate monthly income for each employee under a 9% commission-based system.
C. Will a commission-based plan result in efficient relative salaries, efficient salary levels, or both?